Corbita Opportunities: The Coming Boom
From the early 2000s until the 2008 global recession, the maritime industry enjoyed boom times and a significant growth in profit margins. This ended abruptly with the onset of the global financial crisis of the late 2000s which initiated a dramatic slowdown in international shipping and a sharp decline of both vessel values and charter rates.
Paradoxically, the industry continued to increase its capacity following this collapse, largely due to a legacy of indiscriminate funding of new vessels. Since 2008, vessels that have been ordered are mostly ultra-large container ships and ultra-max geared bulk carriers, while the orderbook for smaller ships has practically disappeared. This overcapacity and the lingering effects of the global recession are the main causes for the sluggishness of the maritime industry in recent years.
What is now being seen is the beginning of a significant correction in the market (especially with container ships) as obsolete, older vessels leave the fleet in large numbers. At Corbita, we believe that a shift is now occurring which is the harbinger of a major industry-wide recovery.
As an example, 104 ships have left the global container fleet since June of 2016, reducing capacity by 2.5 million deadweight tons and triggering an increase in charter rates. Indeed, the price for shipping a 40-foot container from Hong Kong to Los Angeles has tripled from $776 to $2,336 in the last several months, the highest level for this route since 2013.
As veterans of the shipping industry with over fifty years in the business, we are projecting that a significant recovery in the market will occur in the near future, and that the current gloom in the maritime world presents some very attractive opportunities. Supply and demand in shipping have always been very inelastic and we expect a boom in ship values and charter rates in the next several years.
Two “Black Swans” that are likely to dramatically change the existing landscape are now emerging:
- The decision to reduce the worldwide ceiling on the sulfur content of fuel oil used by ships from 3.50% to 0.50% by 2020 was taken by the Organization Maritime International (IMO). Thus, vessels will need to either use a fuel oil five times more expensive than the current heavy fuel oil, or install a scrubber to remove most of the sulphur oxides from vessel engine emissions. It is estimated that the implementation of these new regulations will cost approximately $1M per vessel.
- The 2004 International Convention for the Control and Management of Ships’ Ballast Water and Sediments (BWM Convention) has been ratified and will take effect on September 8th, 2017. This regulation was made in order to prevent the proliferation of harmful invasive aquatic species. The cost of complying with this convention is also estimated to be approximately $1M per vessel.
These stricter environmental regulations will have the effect of requiring ship owners to invest heavily to bring their fleets up to speed. For the few well-funded large companies such as Maersk or MSC, this does not pose a major problem. However, for the majority of small ship-owners (including almost all German and Dutch containership-owners), this will have far-reaching and dramatic consequences.
Meanwhile, the demand for world maritime transport is constantly increasing and will not stop in the medium term. What is surprising to note is that there are virtually no new vessels on the market, nor in order books. We feel that the large-scale scrapping of much of the existing fleet combined with the increasing demand for maritime transport will inevitably lead to a significant increase in charter rates and ship values in the next few years.
Today is the time to buy ships which that have just been built for ship-owners who are unable to take delivery due to lack of resources. As an example of the bargains to be had in the current environment, one ship that was built for a price of $50M in 2008 can be purchased new for $19M today. Bulk carriers and container ships that were ordered for $40M in 2007 and can now be purchased new for $22M.
At Corbita, we are currently focused on two types of shipping opportunities where the vessels have been built for owner who are unable to take delivery and the shipyards are anxious to find new buyers:
A) The purchase of SDARI 64 bulker ships
B) The purchase of Bangkokmax and Kielmax feeder container ships